Of austerity, debt relief and pétanque: Olivier Blanchard, an ‘economist’s economist,’ arrived in Washington just in time for the battle against the Great Recession and returned the International Monetary Fund to its intellectual roots.
When David Lipton, a promising economist, was finishing his graduate work at Harvard University in the early 1980s, he faced one of those potentially life-changing choices. He had one job offer from the International Monetary Fund in Washington, the multinational institution that for 70 years has served as lender of last resort and dispenser of orthodox economic advice to countries that get into financial trouble. There was also an offer of a teaching job from the University of Virginia. Unsure of which path to take, he turned for advice to an intellectually restless and charismatic assistant professor, a Frenchman named Olivier Blanchard. Blanchard’s terse advice: “David, if you go to the IMF, you’ll be throwing your career away.”
Life, however, takes unexpected turns. Last week, the same intellectually restless and charismatic Blanchard stepped down as the IMF’s top economist after seven tumultuous years that included the worst financial crisis in a generation, a global recession, a three-act Greek tragedy and the near-collapse of the euro. Over his two terms, Blanchard helped wean the IMF off its obsessions with low inflation, fiscal austerity and unregulated flows of capital, resurrecting the economics of John Maynard Keynes at an institution that the British economist had helped to create but where, more recently, he had fallen out of favor.
As one colleague put it, Blanchard “changed theway the Fund looked at the world and the way the world looked at the Fund.” Inthe process, he helped the IMF pull the global economy back from the brink of another Great Depression.
“He was exactly what the world needed at a crucial moment,” George Akerlof, a Nobel laureate, said of Blanchard’s tenure at the IMF.
Blanchard’s story, however, is not just one about an important but obscure Washington-based institution. It is also a personal tale of a once radical French youth who became one of the most influential economists whom most people have never heard of. Blanchard’s tenure at the IMF capped a lifelong effort to restore economics as a disciplined way of thinking about the world that is truthful, intuitive and useful.
“Olivier is one of those rare academics who deserve to have a license to practice,” said the IMF’s first deputy managing director, the second in command, sitting in the Fund’s headquarters on Pennsylvania Avenue. “The world is full of economists who are willing to believe only what they can prove. We don’t have that luxury here. What we do has to be based not just on what we know but on our judgment about what we don’t know. Let’s just say we came to trust Olivier’s judgment.”
That deputy director? David Lipton.
As one of the world’s leading macroeconomists, and for 25 years a mainstay at the star-studded economics department at the Massachusetts Institute of Technology, Blanchard was an obvious choice for the job of research director and economic counselor. Twice he’d been offered the job. Twice he had turned it down.
But when Dominique Strauss-Kahn, the IMF’s new managing director, called in spring 2008, Blanchard was more than a little intrigued. Strauss-Kahn was a fellow Frenchman and a graduate of the same French university. As the leading Socialist candidate to be the next president of France, he had the stature and political skills to deal with the presidents, prime ministers and treasury secretaries who ultimately call the shots at the IMF, which was created in 1946 at an international conference at which Keynes was a central figure. Strauss-Kahn promised Blanchard an activist agenda along with a more visible role for the research team.
“He’s a politician, so within two minutes he’s your best friend,” Blanchard said.
Blanchard remembers his first months in Washington as “confusing, exciting, frustrating,” as increasingly desperate world leaders searched for away to contain the financial contagion that had spread quickly from the United States to Europe and the rest of the world. With the IMF providing much of the economic analysis, European leaders set aside their fixation with budget deficits and committed to join the United States and Britain in increasing government borrowing and spending to prevent a global depression. It was exactly the advice Keynes had given to skeptical world leaders in the 1930s.
“We knew that 1 percent stimulus was not enough, but 3 percent we probably couldn’t sell,” Blanchard said, “so we went with a recommendation of 2 percent.”
Under Blanchard, the researchers gained a seat at the table where IMF decisions were made. Strauss-Kahn said that at his meetings with top lieutenants, Blanchard “quickly took the lead, and his opinion prevailed eight out of 10 times.”
Blanchard exhorted his staff of 100 economists to be less academic and focus their research on questions of immediate concern. By all accounts, he raised the bar on the quality of research, demanding more rigor in the analysis and greater clarity. When a colleague hit a dead end, Blanchard was not above taking out pencil and paper and spending an evening writing out amathematical model.
Strauss-Kahn, always on the lookout to raise the Fund’s visibility, had charged the research department with joining the global debate over income inequality. Blanchard was skeptical of the early analysis — it wasn’t obvious to him whether inequality caused slow growth or the other way around — but after rounds of backand-forth he finally signed off on a paper concluding that high levels of inequality were likely to result in growth rates that were “low and unsustainable.” The team also found no evidence that the level of government redistribution found in Europe or North America had any adverse impact on growth rates. The paper has become the touchstone for what Jonathan Ostry, its lead author, only half-jokingly calls the “kinder, gentler IMF.”
Meanwhile, Blanchard had raised eyebrows when he suggested that the Federal Reserve and other central banks aim for inflation rates of 4 percent rather than the 2 percent target now commonly used. Inflation and easy money are not the sorts of things one usually associates with a conservative financial institution dedicated to ensuring that lenders are repaid and currencies retain their value. But in an era of slow growth and frequent financial crises, Blanchard argued, higher inflation and interest rates in good times would give central banks more headroom to cut rates in bad times to stabilize economies.
“There’s nothing scientific about 2 percent,” Blanchard said. “It comes from nowhere. It’s completely made up.” While some academic economists are intrigued, central bankers have not rushed to pick up on his very Keynesian proposal.
Intimidating but sweet
Justin Wolfers, a hot young economist, vividly recalls the first course he took from Blanchard at MIT: “The class was over sold. Every corner of the room was packed. The lectures were flawlessly given. It was profoundly intimidating.”
“Intimidating” is how many people describe their first impression of Blanchard.
“He struck me as smarter than me,” said Ken Rogoff, a fellow graduate student at MIT. Rogoff, another former research director at the IMF, is a chess grandmaster when not teaching at Harvard.
The other description you hear is “direct.” “Extremely polite but extremely direct,” a colleague says.
Several years ago, Wolfers — who would write his thesis under Blanchard — published a paper that, for him, was uncharacteristically theoretical and complicated. As Wolfers said, “it was more about flexing intellectual muscles than saying something true or important about the world, which is the folly of young economists. Shortly afterward, I got a note from Olivier: ‘I saw this paper. I don’t care for it.’ It was an incredibly generous thing, taking the time to tell me I wasn’t being true tomyself.”
Many friends and colleagues remark upon this hard-on-the-outside, soft-on quality. At the Fund, he lunched regularly with interns and junior staff. On take-your-child-to-work day, he once used dominoes to explain financial crises to young would-be economists. His farewell party in July drew more than 500 people.
Scott Simon, the NPR host, describes Blanchard as a doting grandfather who’s always up for a game of ping-pong with at the pool at the Watergate complex where they both live. (“If he weren’t French, I’d say he put a lot of English on the ball,” Simon said.)
There are in Blanchard’s outward reserve, natural elegance and wry humor strong hints of the French professional class from which he came. His father was a neurologist and pediatrician, his mother a psychiatrist. His grandfather, Maurice Bokanowski, had been a minister in the French government after World War I, which in those days was unusual for a Jew. He died in an airplane crash in 1928.
By his own account, Blanchard was an indifferent student, “smart but uninterested.” He did not have the grades to gain admission to one of the “grandes écoles” that still serve as gateways to the French economic and political elite.
Two things happened while Blanchard was at the University of Paris-Nanterre that would shape his professional life.
One was the 1968 riots that shut down universities and prompted battles in the streets of Paris as police stormed student barricades. Blanchard, who was in the thick of it, found it “incredibly exciting intellectually.” But in time heal so found the internal struggles among the Maoists, Trotskyites and anarchists tiresome.
Also at Nanterre, he developed a fascination with economics. It came unexpectedly while he was laid up in bed with a long illness, reading a book on the history of economic thought. But as he would discover, the economics course at most French universities was “abominable,” often given over to “high mathematical abstraction or Marxist rhetoric, with little connection to reality.” To win his master’s degree in economics, he submitted what he describes as “a typically French thesis at the time, 200 pages of largely nonsense with math in it.” It was good enough, however, to earn the highest grade at Nanterre that year and admission to the PhD program at MIT.
For a student, being admitted to the economics program at MIT in the late ’60s and ’70s was like a young baseball player being drafted by the New York Yankees of that era. The paterfamilias was Robert Solow, the Nobel Prize winner, assisted by Stan Fischer (now vice chairman of the Fed). Today, their students constitute a who’s who of the world’s top academic economists and policymakers: Nobelists such as Akerlof, Joseph Stiglitz, Peter Diamond, Paul Krugman and Jean Tirole; former Fed chairman Ben Bernanke; and Mario Draghi, president of the European Central Bank.
“Olivier was just less nerdy and uncool than the rest of us,” Krugman recalled.
After a short stint as an assistant professor at Harvard, Blanchard returned to MIT as a professor, where he taught for 25 years. He was department chairman, co-edited the country’s top-ranked economics journal, published a widely used textbook and was rated among the department’s most popular teachers. He also mentored a generation of star economists. Blanchard is ranked first in the world for the number of citations his students have received for articles published in top economics journals. (For his own articles, he is ranked No. 11.) “An economist’s economist,” said Richard Thaler, a behavioral economist at the University of Chicago.
Within the profession, Blanchard and his MIT colleagues were at the center ofan effort to incorporate some new theories pioneered by more-conservative, freemarket economists — about the rational and forward-looking behavior of consumers and investors— into the old Keynesian framework in which markets were imperfect and competitive and not always selfcorrecting. Their work laid the foundation for what would be called the “New Keynesian” model now widely embraced by central banks and policymakers.
According to colleagues and students, what distinguishes Blanchard from other economists is his ability to simplify seemingly complex problems. “Clarity of expression, clarity of mind,” is how Solow puts it. “There’s a neatness about his mind that stands out. Nothing extra.”
In a profession in which reputations are made by mastering subjects that have become increasingly narrow and technical, the variety of topics Blanchard has studied is extraordinary. Indeed, it is because of that breadth that Blanchard acknowledges he is unlikely to win a Nobel Prize. “I did not fundamentally change our view about anything,” he said, wistfully but with no sign of regret. “I tried to provide useful insights on many things rather than obsessing about one.”
A few days later, perhaps thinking of that exchange, Blanchard sent an e-mail saying he had been rereading a book by his psychiatrist mother and came across a sentence she had written about her work that summed up his own approach to economics: “I am not a guru or a magician. I think of myself as an artisan.”
‘I think I’m totally French’
As he has every summer since high school, Blanchard returned this year to the island of Reoff the Atlantic coast of France. Once a working-class enclave, Re has become the Martha’s Vineyard of France, with high-speed trains from Paris whisking much of the 5th and 16th arrondissements to their August vacations.
Long before the sun is up, Blanchard has been checking on the overnight gyra neighbors when lounging tions of the Chinese stock market and editing the latest drafts of the IMF’s annual World Economic Outlook sent by his staff. By 10, he may be playing tennis with his old friend Lionel Jospin, a former professor and prime minister of France. Afterward, he’ll change into his signature khakis, blue shirt and boat shoes and head to LeV, a cafe overlooking the harbor, for a coffee with his brother or a regular gaggle of civil servants, lawyers, businessmen and journalists.
Nearby, at the open-air market, his wife, Noelle, gathers the makings of a picnic lunch at one of the island’s many beaches. Late afternoons, the lanky economist can in variably be found playing a few rounds of pétanque, the French bowling game, as the sun sets over the nearby dunes. There’s likely to be an informal dinner around the large pine table with friends and visitors at his townhouse, with its view of an old windmill in the distance.
Blanchard seems at times to be more American than French. Aside from summers in Re, he has lived in the United States for more than 40 years. He’s raised three daughters here — one works for the State Department and the others live in Brooklyn. He prefers American football to European soccer. (“It’s like playing chess but with a physical aspect. Each play is such a beautiful thing.”)
And given the intractably ideological nature of French economics and the rigid hierarchy of the academic profession there, he’s never given much thought to returning home. After the IMF, he’ll remain in Washington as a senior fellow at the Peterson Institute, the preeminent think tank for international economics.
Yet there is still an unmistakable French accent to Blanchard’s speech, thought and manner. He will tell you why French universities are mediocre and why the 35-hour workweek is a terrible idea. He can list the ways French politics and culture have gone stale. Yet when an American offers such criticisms, he is quick to defend his native country. “I think I’m totally French,” he said, “only maybe a bit less cynical.”
Beating back the ‘austerians’
The prime minister was not pleased. It was April 2013 and Blanchard was in London, giving a live interview on Sky News. Earlier that year, the IMF had lowered its growth forecast for Britain, citing the negative impact of deep budget cuts that were at the heart of the economic program of David Cameron’s government. Now here was Blanchard declaring that by continuing to pursue a policy of fiscal austerity, Britain was “playing with fire.”
It wasn’t long before the phone was ringing back in Washington in the office of Christine Lagarde, the IMF’s managing director. Cameron was on the line.
“There were strong interactions” is all that Blanchard, with an impish grin, will say about the ensuing conversations.
Blanchard’s foray into British politics was part of larger campaign to restore Keynesian policies to their rightful place at the Fund and discredit the notion, which had gained currency over the previous decade, that reducing budget deficits can pull economies out of recession.
Beginning in 2011, Blanchard’s research department began churning out empirical studies showing that, in most advanced economies, at least, imposing fiscal austerity during recessions was a bad idea— that the boost in investor and consumer confidence that austerity was supposed to deliver was not enough to offset the economic drag from cutting spending and raising taxes. Preaching fiscal rectitude was in the IMF’s institutional DNA, but the new research made it possible for Blanchard and his allies to overcome it. “Olivier won the economic argument on balancing austerity and growth,” Lipton said. “The only arguments left involve politics and diplomacy.”
Nowhere did the austerity debate become more heated than in the five-year struggle to find a solution to Greece’s financial and economic crisis. At its outset in 2010, European officials insisted that any rescue of a government they viewed as profligate and inept required deep budget cuts and higher tax revenue, despite warnings from Blanchard and his colleagues.
The IMF team was also unsuccessful in seeking a “restructuring” of Greek debt, the polite term for forcing lenders to accept a reduction in the amounts they would be repaid. The reason: French and German banks held so many Greek bonds that any restructuring might require taxpayers to bail out the European banking system, a political non-starter with European leaders. Jean-Claude Trichet, head of the European Central Bank, also feared that forcing investors to take a “haircut” on Greek bonds might trigger panic selling of the bonds of Italy, Spain and Portugal.
In the end, the IMF relented, agreeing to participate in a Greek rescue that Blanchard and many of its officials believed was doomed to fail. To rationalize its participation, the Fund had to issue an economic forecast that the structural reforms required of the Greek government — deregulation of labor and product markets, an overhaul of the pension and tax collection systems, the sale of government-owned monopolies — would provide such an immediate boost to the economy that the spending cuts and tax increases would result only in a short, mild recession. The Fund also had to break its rule against making loans to countries so indebted that the money was unlikely to be paid.
“I was sure the debt was not sustainable,” Blanchard said, “but we felt we had no other choice but to take the political constraint as a given and go along with a package we were rather skeptical about.”
The next year, however, Strauss-Kahn resumed his behind-the-scenes campaign for a restructuring of Greek debt. In May 2011, he headed to Europe to try to persuade political leaders to take a new approach to financial rescues. He never made it. Enroute, he was arrested in New York for allegedly sexually assaulting a hotel maid — a charge for which he would never be convicted but which led to his resignation from the IMF.
His replacement was Lagarde, who in her previous role as French finance minister had vigorously opposed any consideration of debt restructuring. A non-economist, however, she came to rely heavily on Blanchard’s advice and soon became a convert to the cause of Greek debt relief. The following year, a restructuring was announced that cut the value of outstanding Greek bonds by more than half.
Unfortunately, it was too little, too late. The Greek economy had shrunk by 20 percent, unemployment had hit 27 percent, and Greek politicians and voters were in no mood to push ahead with the structural reforms they had promised. Greece was again on the verge of default as a new left-wing government demanded not only relief from fiscal austerity but further debt relief as well. And once again, European leaders offered another loan package requiring continued austerity without any debt restructuring.
Only this time, the IMF refused to go along. In June, Blanchard used a blog post to declare that no rescue would succeed unless Greece was granted additional debt relief in the form of lower interest rates and a length y moratorium on repayments. Six weeks later, Lagarde confirmed that the IMF would not make any more loans without substantial additional debt relief. New talks have begun, and the betting is that some sort of restructuring is inevitable.
The tyranny of bad ideas
Having to reconcile the supposedly scientific insights of economics with political and bureaucratic realities proved even more challenging than Blanchard had anticipated. What he found most surprising, he said, was how quickly a consensus can develop around some question on the basis of what decision-makers read in the press or hear over dinner.
“There’s a big risk of people agreeing on something without thinking about it or doing the hard analysis,” hesaid. In the face of incomplete information and genuine uncertainty, he said, it was disquieting “how easily bad ideas become entrenched.”
“It’s a strange process,” he mused, but one he is likely to miss.
Olivier Blanchard stepped down last week after seven years as chief economist at the IMF. His next act: senior fellow at the Peterson Institute.
Olivier Blanchard, right, withMaurice Obstfeld, his successor as chief economist at the IMF. Obstfeld describes Blanchard, his former MIT classmate, this way: “Elegant, simple, logical, intuitive.”